Khadija was running a new business selling designer wedding dresses. She had found a shop that was willing to stock her products and was very excited about this opportunity. She also told me that the owner of the shop had agreed to take less of a profit on her dresses than on those she sold from other suppliers. Khadija explained that she couldn’t afford to offer a significant profit to the retailer, and hoped that she understood the situation. The retailer did understand and kindly agreed to sell her dresses anyway. But the pricing policy meant that there was less financial incentive for the shop owner to sell her dresses, than those of her rivals, so she didn’t promote them strongly, and certainly didn’t put Khadija’s wedding dresses in her shop window; they were left at the back of the shop. Sales were disappointing.
My advice was to change the situation around, and increase the retail price of the dresses so that the retailer made a handsome profit. Now there was a clear financial incentive for the shop owner to promote these dresses – she put them in the window, and offered them as the first choice to customers.
When I was managing my first enterprise, a bookshop in a small town, a woman from a community group came in, asking us to sell copies of the pamphlet they had produced. The pamphlet sold at £1 and this price was actually printed on the cover. As a bookseller I asked about the discount the publisher would give us against this price. (At that time bookshops received approximately 1/3 discount against the retail price). The person selling the pamphlets looked blankly at me and asked, ‘What do you mean?’ She said that they had not published the booklet to make a profit and were selling it at £1 because that was the production cost. In response, I said that usually we sold books at a higher price than we bought them (trying not to sound sarcastic). I explained that the difference between the price we bought them and sold them was how we paid our rent, other costs and our wages. There was absolutely no financial incentive for us to stock this book or to sell it. (Actually, in this instance we did stock and sell the book, taking a financial hit because we wanted to support the community group and their message. Other retailers weren’t so understanding.) I advised her to think about the needs of retailers when publishing the next pamphlet.
Pricing becomes more complex if we sell our products through intermediaries in the distribution process along the way to the end user. We need to make sure the pricing policy works all along the supply chain – that it is profitable for the wholesaler and retailer to promote and sell our goods. These pricing decisions can incentivise or disincentive the business partners we depend upon to get our product to the end-user.
Key Points
If we are using distributors and retailers to sell our products, we need to ensure that they have an incentive to promote our products above the alternatives. Pricing and profitability needs to work for everyone involved in our distribution channels.
What to do next
• Find out what profit margins and incentives rivals offer to distributors and retailers. Make sure that you’re not disadvantaged by offering less attractive prices and terms to them.